Kraljic Matrix Model | Purchasing Strategies in the Kraljic Matrix

Who is Peter Kraljic?

The Peter Kraljic Matrix was first described in the article Purchasing Must Become Supply Management in the Harvard Business Review, September October 1983 Edition.

Peter Kraljic was, for more than 30 years, a senior executive at McKinsey and Company in Germany, where he worked with industrial clients in sectors such as chemicals, pharmaceuticals, and automotive.

What is Kraljic Matrix Model?

A Kraljic matrix is an important tool that helps organizations to minimize the vulnerability of their supply chain system while at the same time maximizing the buying power that they can have from the goods that they are offering.

The Kraljic matrix is used to analyze the purchasing portfolio of a firm and thereby support corresponding decisions and actions regarding purchasing commodities and products.

This matrix helps a company gain insight into the best purchasing materials and the amount of time spent on different products. The Kraljic portfolio purchasing model also clarifies which material sourcing can be subcontracted and therefore does not have to be ordered again and which level of risk materials are involved.

The matrix consists of two dimensions. These are the

• Complexity of Supply Market in Kraljic Matrix
• Purchasing Strategies in Kraljic Matrix

Complexity of Supply Market in Kraljic Matrix

By complexity, we mean that supply can be scarce.,

Technologies; that there are constantly new technologies coming on the market that can substitute existing technologies. It could be new plastic alloys that could replace metals in the production.

Costs;  how difficult it is to produce or how expensive it is to start new production of the item in question.

If the market is a monopoly or oligopoly and access barriers are high for new entrants, then it may be difficult to obtain the products in demand in short as well as in the long term.

The supplier market’s complexity contains many different elements that must be considered when the matrix is used.

Purchasing Strategies in the Kraljic Matrix

Purchasing Strategies in the Kraljic Matrix is aimed at understanding the strategic importance of purchasing for the company.

• It may concern the percentage share of raw materials in the total cost.
• How much influence raw material prices have on the profit of the end product and their impact on the firm’s profitability.

Kraljic Matrix Model

Both dimensions go from low to high. This two times two matrix contains four categories. These are

• Non-Critical Items.
• Leverage Items
• Bottleneck Items
• Strategic Items.

 

Source: Peter Kraljic, HBR

 

Non-critical items In Kraljic Matrix

Non-critical items are easy to buy and have a relatively low impact on financial results.

The quality is standardized. They could be standard products such as screws, nuts, etcetera. They are products where there are many possible suppliers.

Administratively, these purchases take up much of the time in the purchasing department, as there are many of them. The department often treats each purchase individually to find the best deal.

Purchasing Strategy of Non-Critical Items

The recommended purchasing strategy is to reduce the time and money spent on purchasing these products by enhancing product standardization and efficient processing.

Your firm can do this by decreasing the number of products and automating the purchases. Most industries have developed IT systems, which confined the best deals on standard products.

Leverage items In Kraljic Matrix

Leverage items are easy to buy products, and they have high importance in the buyer’s economy. They are standard goods with many suppliers available, and it is easy to switch suppliers.

Purchasing Strategy of Leverage items In Kraljic Matrix

The recommended purchasing strategy is that the purchasing function continuously negotiates lower prices. This can be done by letting the various suppliers submit a tender for large orders for successive deliveries.

The supplier achieves economies of scale in production, and our firm does not suffer excessive storage costs.

Bottleneck items In Kraljic Matrix

Bottleneck items are products that can only be acquired from one supplier or very few suppliers, or their delivery is unstable. This may be due to suppliers located in political unrest areas, or it isn’t easy to manufacture the product.

The product or products have a relatively low impact on the financial results of your firm.

It is often difficult to change supplier as the product is a special item.

Purchasing Strategy of Bottleneck items in Kraljic Matrix

The purchasing strategy must minimize the risks related to buying the product. Therefore, it is recommended to sign contracts on a long-term basis with the individual suppliers.

Additionally, the purchaser can keep extra stocks. If the complexity of the supply market is very high, the buyer can look for potential suppliers that can deliver an alternative product from a market that is less complex, which can replace the bottleneck item.

Strategic Items in Kraljic Matrix

Strategic items are products that can be acquired only from one supplier or very few suppliers.

The product also has high importance in the buyer’s economy.

It often involves specialized products where it is difficult to change, suppliers and the products are crucial for the process or the buyer’s product.

The company is highly dependent on the product and, consequently, the supplier that delivers it.

Purchasing Strategy of Strategic Items in Kraljic Matrix

The recommended purchasing strategy is to form a partnership between us as a company and the supplier. The close partnership can be achieved by co-creating the product with the supplier, preferably with much openness as possible, so our supplier does not exploit our vulnerabilities.

We cannot obtain the product from other suppliers, and it is crucial for our financial performance.

Source: Peter Kraljic, HBR

An example using the model. /It is the automotive industry.

Non-critical items examples; standard bolts

The car manufacturer buys a lot of standard bolts to be used in production. These are clearly non-critical items in Kraljic Matrix.

• The economic importance is low, and there are many possible suppliers of the product.
• We must reduce the time and money spent on these products by enhancing product standardization and deficient processing and purchase.

Leverage Items examples – Car Bodies -Aluminum

• The manufacturer buys Aluminum car bodies, and they are a big part of the car’s value.
• Many suppliers can manufacture them.
• It is a volume item as it represents a high percentage of the buyer’s profit, and there are many suppliers available.
• We need to ensure as low a price as possible and preferably no stock. Therefore, we let our different suppliers bid on large orders for delivery following the just in time principle.

Kraljic Matrix Bottleneck Examples -Rare Raw Materials

The car includes a theft protection system with GPS, which contains rare raw materials.

• It represents a very small value of the system. There are few providers of rare raw materials, and their supplies are unstable.
• The rare raw materials are a bottleneck item supplier. Delivery is unreliable on the rare raw materials have a relatively low impact on the financial results.
• We will therefore try to tie the selected suppliers up with contracts and as extra security. Keep stocks.

Strategic Items examples -High-tech windshield

•  We have installed a high-tech windshield in our cars, which enables the driver to see it a night.
• The product represents a great value of the car. It is the main selling point for the car.
• There is currently only one supplier of the technology. It is clearly a strategic item.
• We must develop the technology in partnership with the supplier. We need a corporation so closely between us on the supplier that we can’t do without each other.

Advantages and Disadvantages/Criticisms of Kraljic Matrix

• It is unclear which elements to include in the supplier market’s complexity and the relative importance between them. The same applies to the importance of purchasing.
• It is not defined whether the model should be used at the product group level or down to the individual product.
• It is not clear whether the model should be used on the department or company level. Each company has to decide this for themselves.
• It is not clear how to differentiate precisely between low and high, and this applies to both dimensions. We must again clarify this ourselves.
• The grading of products in each category can change over time. The model appears static, but the world is dynamic.
• Power relations between us as a company and our suppliers are not a subject in the model.
• The model has a clear strength in a relatively simple manner. The model achieves a result that gives us a useful procurement strategy.